Friday, May 16, 2014

Public Relations and Advertising Costs - Part 4

Today we're going to conclude our brief series on Advertising and Public Relations costs and their treatment under Government contracts. This has not been a particularly litigious area since the cost principle was revised in 1986. Prior to that, public relations costs were not specifically addressed in the FAR. In the early 80s, auditors were being very aggressive in their reviews of public relations costs and variously called them "advertising" or sometimes took exception based on "unreasonableness". There were Congressional hearings in 1984 where DCAA and GAO testified about the huge loopholes in the Advertising cost principle that allowed contractors to recover public relations costs. These hearings ultimately led to a significant revision to FAR 31.205-1 to include Public Relations costs in addition to Advertising.

Recent conflicts over allowability seem to focus on the term "primary purpose" about which we discussed yesterday. Depending upon the "primary purpose", the costs could be allowable or unallowable. Contract auditors will often try to build a case to show that the primary purpose was for unallowable activities. Usually however, the contracting officer, who has to adjudicate differences of opinion, are unable to sustain the audit position.

For many FAR cost principles, Agencies have, from time to time, adopted supplemental provisions. That is the case here with the Public Relations and Advertising cost principle. The DoD FAR Supplement (DFARS) adds additional prohibitions to what can be claimed under this cost principle.

Sometimes, Government contractors lease back some of the airplanes, tanks, or ships they build for the Government in order to display them at air shows and the like. The Government usually charges those contractors a leasing fee for the privilege. DFARS prohibits contractors from including those lease fee arrangements, including reimbursements for support services in their proposals and claims - even though the activity itself is allowable under other provisions of the FAR cost principle. This DFARS prohibition does not apply to FMS (Foreign Military Sales) which means that contractors affected by this prohibition will need to calculate separate rates for FMS.

There was a Board case (ASBCA or Armed Services Board of Contract Appeals) from 1973 that addressed the allowably of public relations costs (The Boeing Co., 73-2 BCA 10325). In this case, the Board found that costs incurred in connection with Boeing's 50th Anniversary celebration, including printing and postage expenses for a city-sponsored anniversary banquet, chartering a plane for dignitaries who would otherwise have been prevented from attending the banquet because of an airline strike, producing a movie and paying to have it broadcast on TV, were allowable public relations costs. This decision predates the FAR cost principle revision so it would need to be considered in light of current regulatory framework before using it as precedent.

If you missed the earlier postings in this series, use the following links:

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